Vol. 127 - NO. 39

Blog Startup CPG

SINCE 2019

Maximizing Profitability:
The Art of Pricing and Promotions

Pricing and promotion are two of the most important marketing levers for CPG brands. They can have a significant impact on sales, profitability, and brand perception. In today’s competitive marketplace, it is more important than ever for CPG brands to have a strategic approach to pricing and promotion. This means understanding your target customers, the competitive landscape, and the latest trends in the market. Inflation is high, and consumer spending power is weak, so CPG companies and retailers need to lean on promotions to maintain sales.

 

Linking Pricing to Promotion

In today’s post-pandemic marketplace, where promotional activity has been scarce, there is a critical opportunity to reevaluate the role of promotions within a brand’s identity and to foster a relationship between retailers and brands. Efficient and effective promotions hold immense value for both CPG brands and retailers.

Although the basic principles of pricing and promotion haven’t changed, the effects of rising prices and changes in how people shop mean we need to be flexible in our approach. To navigate these changes successfully, it is essential to have access to accurate and up-to-date data to make informed decisions quickly. The benefits of improved promotions are multifaceted, as they not only provide value to shoppers but also cultivate brand loyalty, generate incremental volume, boost market share, and enhance return on investment. Furthermore, maintaining pricing consistency across channels and enforcing clear MAP (Minimum Advertised Price) policies are crucial to help brands control the depth and frequency of discounts more effectively.

In addition, an effective promotional strategy should strike a balance between offer frequency and mechanics, being careful not to over-promote, as over-promotion can erode base volume and lead shoppers to rely solely on deals. Careful analysis of promotions against predefined KPIs can help determine the optimal combinations of offers, prices, and promotional calendar cadence to drive growth and success.

The Story of Pricing and Promotion

Interestingly, budget-conscious shoppers are not solely seeking the most affordable items. When it’s time to save, they seek value – and value is a complex concept that blends brand, quality, price and promotion. Further, consumers don’t always react strongly to their purchasing behavior when their net income changes. But, when there’s ongoing economic uncertainty – like the kind that inflation has been historically produced – they change their behaviors.

Data is the key to mastering the art and science of optimizing the right price, pack and portfolio mix in an ever-changing landscape. But CPG companies and retailers can’t apply yesterday’s rules to today’s game. COVID-related disruption means historical benchmarks are irrelevant or nearly so. Without data, ongoing dynamic economic forces and their effect on consumer buying behavior will make pricing and promotion challenging, if not impossible, to get right.

Operating with a Full Toolbox

In the pursuit of the most effective and profitable path forward, it is crucial for both CPG brands and retailers to have a comprehensive arsenal of pricing and promotion tactics at their disposal. This pertains not only to the implementation of the five common strategies themselves but also to the utilization of available data for strategy selection and timing. Timing assumes heightened significance in an unpredictable economy, as inflation exerts a more substantial impact on CPG products compared to other categories. When consumers confront escalating prices, they may increasingly turn to promotional offerings. However, this prolonged reliance on promotions can gradually eat at profit margins and sales velocity. Therefore, marketing teams must refine their pricing and promotion strategies to effectively counteract the inflationary pressures working against them.

As mentioned, there are five common strategies that your organization should consider when building a promotional strategy:

  1. Cost-based Pricing considers the whole pricing package, calculating production costs for a product and then adding a predetermined markup for the sales prices.
  2. Competitive Pricing is another pricing strategy that informs the price point by matching or undercutting competitor products.
  3. Penetration Pricing is a dynamic pricing strategy that involves launching products at a low price to spark interest and then raising prices once demand is built.
  4. Value-based Pricing, also known as demand-based pricing, involves researching demand to set pricing that matches consumer needs.
  5. Price Skimming, the opposite of penetration pricing, involves launching products at a high price and then lowering them once competition enters the market.

 

Everyday Low Pricing (EDLP) vs. High-Low Pricing

Beyond the five pricing strategies, we must consider Everyday Low Pricing (EDLP) and High-Low Pricing. EDLP aims to maintain consistent low prices for mature brands in static categories, prioritizing operational efficiency and offering a better ROI than trade promotions. In contrast, High-Low Pricing suits products with high expandable consumption, leveraging seasonal spikes and events to entice consumers through deep discounts. CPG brands need tailored strategies for EDLP retailers, like Walmart, focusing on cost optimization and price consistency. High-Low retailers like Target seek a balance between pricing and promotions to recoup margins and induce behavior changes. An emerging alternative is private labels used by value retailers like Aldi, Lidl, and Trader Joe’s, offering unique options with low manufacturing costs to attract customers seeking distinctive value. In navigating these strategies, CPG brands must align with each retailer’s objectives and value propositions.

 

Pricing and Promotion Data Tools

Achieving efficiency and profitability in pricing and promotion strategies is a multi-step process. Beyond the initial planning, it’s equally important to continually review and adapt pricing to align with your brand and consumer preferences. Regularly assessing the effectiveness of your decisions and optimizing them based on data-driven insights is essential. Access to data that traces decision outcomes allows for ongoing evaluation and fine-tuning, resulting in mutual benefits for both the CPG brand and the retailer. Effective measurement tools play a crucial role in this process, ensuring a successful and responsive pricing and promotion strategy.

 

NIQ’s Ultimate Guide to Pricing and Promotion

The ability to set the right prices can make the difference between making a profit, breaking even, or losing money during promotions. It’s crucial to equip your sales teams with promotion evaluation tools to capture these efficiencies. That’s why NIQ has developed The Ultimate Guide to Pricing and Promotion. Download the full guide to get deeper insight into building effective pricing and promotion plans in the post-COVID era.

Additionally, because you are a part of Startup CPS’s community, NIQ is offering a complementary Byzzer account, and access to three free reports. Don’t miss this opportunity to get The Full View of your business, sign up now!

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